Treasury Secretary Bessent uses hedge fund tactics in joint US-Japan yen intervention

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From Breaking the Bank of England to Defending the Yen: Bessent’s Currency Pivot

Scott Bessent was in his early 30s, working at Soros Fund Management, when the Asian financial crisis tore through currency markets in 1997 and 1998—a crisis he said was triggered, in part, by an overly weak yen. He was in his late 20s, working under George Soros and Stanley Druckenmiller, when they shorted the British pound and “broke the Bank of England” just a few years earlier.

Nearly three decades later, sitting in the Treasury Secretary’s chair, the former hedge fund manager is watching the Japanese yen wobble again. This time, it is his job to stop it rather than trade off it. That may explain why he surprised the market with such a quick and bold move—the U.S. government’s first joint currency intervention with Japan since 2011, which helped the yen rise on Monday.

“The fact that he clearly understands the yen in a way most Treasury secretaries or Fed chairmen would not definitely is part of the reason why you saw the reaction you did,” said Joe Brusuelas, chief economist at RSM, who has analyzed U.S. monetary policy and international finance for two decades. “At least for now,” Brusuelas told Fortune, “investors are willing to cut him some slack when he takes risks that other Treasury Secretaries over the past two generations wouldn’t.”

From Shorting the Yen to Buying the Yen

Two things seem to give Bessent credibility in deciding whether or not to intervene with the yen:

• He helped engineer some of the most aggressive bets against foreign currencies in Wall Street history.
• He has made over 50 or 60 visits to Japan since 1989 and has known the Bank of Japan governor for over 15 years.

“Japan has come out of deflation and they’re back, and I think here, we can give market signals,” Bessent told CNBC while explaining the Treasury’s decision to buy the yen.

Hedge fund managers operate on a simple premise when it comes to currency: governments and central banks will periodically try to hold it at a level the underlying economic conditions cannot support, and eventually the market forces a correction. Bessent helped the legendary macro traders Soros and Druckenmiller spot that gap early to short the British pound when he was 29 years old. They pocketed $1 billion and became infamous for “breaking” the Bank of England.

Bessent “could see the vulnerabilities in a way that most other people in the financial markets didn’t see,” David Smick, an adviser to Soros during the bet, told The New York Times.

While critics viewed that bet as predatory profiteering at the expense of national economies, those same instincts—identifying the true value of a currency—are likely guiding Bessent’s decisions now. The Treasury said the yen was undervalued last month.

This may have informed his decision to buy yen with euros instead of dollars, even though it drew backlash from economists who said the intervention did not make sense without fixing Japan’s underlying fiscal issues. Bessent insists that the U.S. is optimistic about Japan’s “policy and fundamentals.”

U.S. Interests and the National Debt

Bessent also has U.S. interests to consider, aside from evaluating Japan’s economic conditions—something he did when shorting the yen as a hedge fund manager over a decade ago.

Brusuelas explained to Fortune that the timing of the intervention was harmonious to both U.S. and Japanese interests. The Treasury did not want Japan—which holds $1.1 trillion in U.S. Treasury bonds—to dump them to buy yen, since that would have pushed U.S. interest rates even higher. The 30-year Treasury bond yield hit its highest level since 2007 after the Fed left rates unchanged on July 29, arriving as national debt approaches $40 trillion, over 100% of national GDP.

How Japan’s Yen Is Tied to the $40 Trillion National Debt

Foreign investors held roughly $9.5 trillion in U.S. Treasuries as of February, according to Treasury Department data—money that helps finance a debt load now barreling toward $40 trillion. However, who is supplying that financing has shifted dramatically over the past decade.

• China, once the largest foreign creditor to the U.S., has been steadily retreating. Its holdings peaked near $1.32 trillion in November 2013 and have since been cut roughly in half, to around $693 billion, dropping Beijing to third place among foreign holders, behind Japan and the U.K.
• Japan, by contrast, has stayed put as the single largest foreign holder of U.S. government debt. This is part of why Washington was so eager to keep Tokyo from being forced into a sale of its own. Unlike with China, Japan’s Treasury stockpile functions less like a geopolitical lever and more like the byproduct of a decades-old alliance and an export-driven economy that has to park its dollar earnings somewhere.

“Bessent, being the hedge fund manager that he is, saw an opportunistic moment where he could damp yields along the curve, bolster the